by Inflation cooled less than expected in January and showed worrying staying power after excluding volatile food and fuel costs, a reminder that controlling price increases remains a bumpy process.
The general Consumer’s price index rose 3.1 percent from a year earlier, down from 3.4 percent in December but higher than the 2.9 percent economists had predicted. That figure is down from the last peak of 9.1 percent recorded in the summer of 2022.
But after excluding food and fuel, whose prices fluctuate from month to month, “core” prices remained more or less stable on an annual basis, rising 3.9 percent from a year earlier. The measure rose monthly to the highest in eight months.
Federal Reserve officials welcomed the recent moderation in inflation and will likely interpret the new report as a statement that they should remain cautious. Officials have been careful to avoid declaring victory over inflation, insisting they need more evidence that it is declining sustainably.
Investors strongly reduced chances of an imminent rate cut in the wake of the data, betting that the Federal Reserve will not lower interest rates at its next meeting in March and sharply reducing the odds that it will do so even at its next meeting in May, a sign They believe the new inflation figures will keep officials cautious.
Fed policymakers have raised interest rates to around 5.3 percent, from near zero in early 2022, in a bid to cool consumer and business demand and force companies to stop raising rates. prices so quickly. Because inflation has been coming down noticeably in recent months, they have paused their rate hikes and are contemplating when and how much to reduce borrowing costs.
But they want to avoid cutting rates before inflation has completely died down, because they worry that doing so could allow rapid price increases to become a more permanent feature of the U.S. economy.
“They were right to be patient, because this is the kind of number that is going to call into question whether there is really much slowdown in store for inflation,” said Omair Sharif, founder of Inflation Insights. “This is definitely a scary figure.”
The slowdown in inflation in recent months has also been a welcome development for President Biden. Rising living expenses have consumed household budgets, weighing on voter confidence even though the labor market is strong and wages are rising at a rapid pace. As price increases have begun to slow, people are beginning to report more optimistic economic prospects.
The question for both the administration and the Federal Reserve is whether the cooling of inflation of the past six months can last, and the new inflation report may keep officials cautious.
“Is it sending us a real signal that we are, in fact, on a path, a sustainable path, to 2 percent inflation?” Jerome H. Powell, Chairman of the Federal Reserve, during his January 31 press conference. “That is the question.”
The Federal Reserve targets average inflation of 2 percent using a separate but related measure, the Personal Consumption Expenditure index. The January reading of that indicator is ready for launch on February 29.
Inflation has been falling for a variety of reasons, but a big driver of the recent improvement has been the recovery of global supply chains. Prices for goods began to rise in 2021, as pandemic-related shipping routes and factory disruptions led to shortages of semiconductors, cars and furniture.
Those problems have slowly been dissipating and prices of goods have recently cooled and, in the case of some products, fallen. For example, used car prices fell sharply in January.
More recently, price increases for key services have also begun to moderate. Economists are now watching closely what happens with one in particular: housing. Rent increases have begun to slow in official inflation data, but many analysts expect that trend to deepen as new, cheaper rentals slowly enter official data.
But on that point, the January report offered reason for caution. A measure that estimates how much it would cost to rent a home someone owns (called owner’s equivalent rent) rose monthly.
The acceleration “seems contradictory to other surveys of rental data that we track,” said Blerina Uruci, chief U.S. economist at T. Rowe Price.
Still, the numbers mean the Federal Reserve will have to remain cautious and that officials are unlikely to cut interest rates until May or June.
“They really need to make sure that inflationary pressures don’t accelerate again before they can cut interest rates,” Uruci said.
